What it means
The two balances almost never agree, and that is entirely normal. Cheques written but not yet presented, deposits banked but not yet cleared, fees the bank has taken without warning and payments entered twice all create gaps.
The reconciliation identifies each gap by name and amount. The working has two halves.
On the bank side you start with the statement balance, add deposits in transit and deduct unpresented payments, because those are items the business already knows about and the bank does not. On the book side you start with the ledger balance and adjust for items the bank knows about and the business does not, such as charges, interest credited and dishonoured receipts.
When both halves arrive at the same number, the account reconciles. Only the book side adjustments require journal entries, because the bank side items will clear by themselves within a few days.
That distinction is the part most people get wrong when they first learn the technique. Control value is the real reason it is done monthly, or daily in cash-heavy businesses.
Unreconciled differences are where errors and fraud hide, whether that is a payment to an unfamiliar account, a duplicated supplier payment, or takings that never reached the bank. A cheque outstanding for six months is a question to be answered, not a rounding item to be written off.
Automation has changed the labour but not the logic. Bank feeds now match most lines by rule, leaving a short exceptions list, and that exceptions list is exactly where a reviewer's attention belongs each month.
In practice
Real-world examples.
Example
A bookkeeper reconciling a builder's merchant account spots the same $3,400 supplier payment appearing twice on the statement. The duplicate is recovered from the bank within a week because it was caught in the month it happened.
Example
A restaurant reconciles daily and notices that Saturday's card settlement is $620 lower than the till report. The gap turns out to be a refund processed at closing time rather than an error, and the note on the reconciliation saves an argument at year end.
Example
An online retailer finds a persistent difference caused by card settlements arriving two working days after the sale. Adding a settlements-in-transit line to the reconciliation makes the pattern visible and stops the team investigating the same item every month.
Formula
Calculation
Adjusted bank balance = statement balance + deposits in transit - unpresented payments. Adjusted book balance = ledger balance - bank charges - dishonoured receipts + interest credited. The two adjusted figures must agree.
The bank statement shows $84,300. Deposits in transit are $12,500 and unpresented cheques total $9,800, so the adjusted bank balance is $84,300 + $12,500 - $9,800 = $87,000. The cash book shows $87,650. Deducting bank charges of $95 and a dishonoured customer cheque of $700, then adding interest credited of $145, gives $87,650 - $95 - $700 + $145 = $87,000. Both sides agree at $87,000, and journal entries are posted only for the $95, the $700 and the $145.Case study
Seen in the real world.
Fenwick Garden Supplies is an invented company used here as an illustration. Its bank account had not been reconciled properly for nine months because the ledger balance and the statement balance were close enough that nobody worried about the difference of a few hundred dollars.
When a new accountant finally worked through it, the small net difference turned out to be several large items cancelling each other out: an unpresented cheque for $4,200 that had been lost in the post, $3,600 of card settlements never posted to the ledger, and a monthly charge of $60 that had been running for two years on a service the company no longer used. Net, the difference looked trivial; itemised, it was three separate problems.
The illustrative point is that a small unreconciled difference is not evidence that the account is fine. Reconciliation is about identifying every item individually, not about getting the bottom line close enough to ignore.
Watch out
Common mistakes.
- Posting journal entries for bank side items such as unpresented cheques. Those clear on their own and adjusting for them double counts the transaction.
- Forcing the reconciliation to balance with an unexplained adjustment. A plug figure hides the very error or fraud the control exists to catch.
- Leaving stale unpresented cheques on the list indefinitely. Anything outstanding beyond a few months should be investigated and, where appropriate, reversed with a proper journal entry.
Questions
People also ask.
How often should a bank reconciliation be prepared?
Monthly is the minimum for most businesses, while companies handling significant cash or high payment volumes should reconcile weekly or daily.
What is a deposit in transit?
Money the business has banked and recorded but which the bank has not yet processed, so it appears in the ledger before it appears on the statement.
Does automated bank matching remove the need for a reconciliation?
No, matching handles the routine lines, but someone still has to review the exceptions, confirm the closing balances agree and sign the statement off.
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